1. Chapter 8: Jevons, Menger and Foundations of Marginal Analysis
Questions for Review, Discussion and Research
1, 2, 5, 6, 7, 8, 9, 10
- Marginal analysis and the use of mathematic helped forge a new set of analytical techniques for the emerging neoclassical approach

2. Forerunners of Marginal Analysis
Cournot (1838)
Economics of the firm, duoploly
Longfield (1834)
Developed marginal productivity theory of distribution
Dupuit (1844)

3. Gossen – Same as Longfield plus first articulation of the concept of marginal utility
Von Thunen
Applied marginal analysis through calculus and the interdependence of markets with simultaneous equations

4. Marginal Revolution
Writings of Jevons, Menger and Walras were original inasmuch as their ideas influenced the subsequent development of economic theory in a way that predecessors did not

5. Critique of Classical Theory of Value
Classical model implies Factor Costs of Production → Determine value of product outputs
Jevons and Menger reversed the direction of causation
Price determination is not dependant on total or average utility but marginal utility

6. What is Utility?
A psychological phenomena with unspecified units of measurement
Utility only derived from consumption
skip pp

7. Utility Functions
Menger’s analysis was verbal and he only used arithmetic examples
Jevons and Walras employed additive utility functions where
Total Utility = f1(Qa) + f2(Qb) + ….
We use a more general form today that allows for complementary and substitution

8. Theories of Exchange
Used principle of diminishing marginal utility to specify the conditions where consumers maximize utility in the consumption of many products
Overhead pp

9. Valuation of the Factors of Production
Classical
Relative prices of outputs depends on costs of production and implies that value comes from the past
2) Neoclassical
Value comes from the future when expected satisfaction is enjoyed in the consumption goods and services (especially durables)

10. Value causation runs from the final pricing of outputs to cost of factor inputs “used up” in the production process
Causal relationship defined within the partial equilibrium framework
Factors of production are not price determining but price determined

11. Evaluation of Jevons and Menger
Always assumed that the supply of outputs was exogenous
Their illustrations indicate that value does not depend entirely upon utility or demand but both supply and demand
Overhead pp

12. Lasting Contributions of Menger, Jevons, and Walras
Overhead pp

13. Was Menger An Early Neoclassical Economist?
Overhead pp. 239

14. Carl Menger
Little influenced by Von Thunen and unaware of Gossen of Mangoldt
Founder of a school of thought that concentrates on the subjective, atomistic nature of economics
Aggregate, collective ideas could not have adequate explanation ??? upon individual decision making and behaviour

15. Overhead pp. 293-94 of other source

16. Weiser and the Theory of Imputation
Adopted highly theoretical, deductive approach of Menger
Used verbal models and did not use mathematics
First to use the term marginal utility

17. The price of a factor of production is measured by the marginal utility the factor yields in marginal, or last, final good consumed
Overhead pp

18. Capital Theory of Eugen Bohm-Bawerk
Builds on Menger’s vision of how a modern capitalist economy is structured
Mengers approach sees capital in terms of a time structure of production

19. Production is organized as a sequential process of activities in which goods of a higher order (capital goods) become transformed into goods of the lowest order (consumption goods)
Capital goods are heterogeneous and are classified by their position along a time continuum in the production process

20. Bohm-Bawerk’s theory of capital was a conscious extension of Menger

21. Capital Theory of Eugen Bohm-Bawerk Cont’d
For Menger, the rewards to save only if time consuming methods of production are adopted and result in higher levels of productivity and higher levels of consumption in the future

22. The introduction of time considerations is his greatest contribution to capital theory and stands in sharp contrast to the instantaneous processes of production in neoclassical theory

23. His central proposition was that the production of final goods (consumption products) takes time and that roundabout methods of production are more productive than direct methods

24. Capital Theory of Eugen Bohm-Bawerk Cont’d
Primitive economics only use land and labour (original means of production) to make goods for “immediate” consumption
Capitalist economies emerge when roundabout and more capital intensive methods are employed

25. Time itself becomes an input and the length of the production period for consumer products is itself a variable
In Figure 12-3 the production period is represented on the time axis

26. Capital Theory of Eugen Bohm-Bawerk Cont’d
Final output increases in absolute terms with a lengthening of the period of production but at a decreasing rate

27. More and more capital is used in combination with the original factors so the ratio of capital to land and labour rises and the final output at consumption goods grows at a decreasing rate
Overhead pp

28. Austrian Economics in 18th Century
-Alfred Marshall Principles (pp.60) states it’s “The most important economic work that has been done on the continent in (the 19th century) is that of Germans

29. Later Generation’s of Austrian Economists
Examined in chapter 13